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Economics- Micro > Unit 3 > Flashcards

Unit 3 Flashcards

1
Q

Competition leads to improved products through…

A

Firms attempting innovation.

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2
Q

Natural barriers to enter/ exit

A

Exist because of the type of industry you’re operating in.

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3
Q

Artificial barriers to enter/ exit

A

Barriers put by firms itself to stop firms from entering.

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4
Q

Sunk costs

A

Costs that already have been spent and you can’t get back.

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5
Q

Examples of artificial barriers to enter/ exit

A
  • Patents (protects ideas)
  • Product differentiation
  • Benefiting from first mover advantage
  • Limit pricing
  • Predatory pricing
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6
Q

Examples of natural barriers to enter/ exit

A
  • Economies of scale
  • Large amounts of capital required. Eg. Oil refining.
  • Large research and development costs are needed
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7
Q

Limit pricing

A

Firms placing their prices low enough so it’s unprofitable for others. Acts as a barrier to entry because small firms entering the market won’t have enough money to compete with low prices.

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8
Q

Predatory pricing

A

Setting prices below average costs with the aim of forcing rival firms out of the business. Acts as a barrier to entry as small firms won’t be able to cover their costs if they’re selling at the same price as already established firms.

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9
Q

Product differentiation (as a barrier to entry)

A

Acts as a barrier to entry as it will force new entrants to invest in developing their product and differentiate their product.

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10
Q

Objectives of firms

A
  • Survival
  • Sales maximisation
  • Profit maximisation
  • Growth
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11
Q

When does profit maximisation occur?

A

MR=MC

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12
Q

Why do firms profit maximise?

A
  • Reinvest funds into developing new products

- Pay out higher returns to shareholders, more people would then want to buy shares so higher share costs.

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13
Q

If MR>MC firms should…

If MR

A
  • Produce more
  • Produce less
  • This will enable firms to profit maximise
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14
Q

When does revenue maximisation occur?

A

MR=0

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15
Q

When does sales maximisation occur?

A

AC=AR

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16
Q

Divorce of ownership from control

A

The separation that exists between owners of the firms (shareholders) and directors in large PLCs. This may lead to conflicting objectives between shareholders and directors.

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17
Q

Conditions for a perfectly competitive market

A
  • Homogenous products
  • Perfect information
  • Price takers
  • Low barriers to enter and exit
  • Large number of buyers and sellers
  • Consumers can buy as much as they want and sellers can sell as much as they want
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18
Q

Elasticity of perfectly competitive firms

A

Perfectly elastic
This is because of the firms increase their price above P, consumers will go to competitors as products are homogenous. If a firm reduces their prices below P, they will not receive any extra sales and will face a reduction in revenue.

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19
Q

Features of a monopoly market

A
  • Price makers/ Quantity setters
  • Economies of scale
  • Heterogeneous goods
  • One dominant firm
  • High barriers to enter/ exit
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20
Q

X-efficiency

A

Occurs when a business is minimising waste, occurs anywhere on AC curve. May not be large enough to achieve productive efficiency.

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21
Q

How can a business achieve x-efficiency and why is it not always achieved?

A

Can be achieved through cutting wages and reducing waste however not all firms are concerned about operating on the AC curve. ie. in the public sector some firms are too big to care.

22
Q

Dynamic efficiency

A

Reinvestment of long run supernormal profits into capital goods. (Eg. moving from SRAC1 to SRAC2). This in the long run allows you to have extra profits however there needs to be enough initial profit to finance the investment.

23
Q

Benefits of monopolies

A
  • Economies of scales can result in lower prices
  • Can use retained profits for R+D spending
  • Dynamic efficiency
24
Q

Drawbacks of monopolies

A
  • Removes competition due o barriers to entry
  • Makes supernormal profits so can charge higher prices
  • Is productively inefficient as they operate at MC=MR as opposed to minimising AC.
  • Is allocatively inefficient as they don’t operate at AR=MC
  • Consumers can be exploited
  • Can be X-inefficient
25
Q

Monopolistic competition

A

A market structure with features of both perfectly competitive and a monopoly market.

  • Resembles a monopoly as it’s got a downwards sloping demand curve due to slightly differentiated products.
  • Resembles a perfect competition as there’s many firms, low barriers to entry/ exit and abnormal short run profits.
26
Q

What do firms in monopolistic competition focus on?

A
  • Advertising how their product is different
  • Brand loyalty and repeat customers
  • Investing in product differentiation
  • Often niche markets as the economies of scale often leads to the creation of highly concentrated markets.
27
Q

Features of an oligopoly

A
  • Only a few large firms
  • Can exploit consumers
  • Barriers to entry/exists exist
  • Try not to compete on price
  • Often there maybe an element of collusion
28
Q

How do oligopolies compete?

A
  • Don’t compete on pricing in the long run, but in the short run they may reduce prices to stop new entrants
  • Try to make their products different from their competitors possibly through advertising and rebranding
  • Tries to create a USP which allows them to charge higher prices
29
Q

Collusion

A

Occurs when a firm in an oligopolistic market agree to act as one firm in order to benefit from elements of a monopoly.

30
Q

Cooperation

A

Firms in an oligopolistic market might cooperate if it’s seen in the best interest of the public.
- Eg. Firms might join together to innovate new a new production process. This benefits society as a whole as efficiency for the industry might improve.

31
Q

Cartels

A

A formal agreement between firms to collude. It normally involves fixing prices or fixing output levels. This allows markets to operate closer to monopolies.

32
Q

Why can oligopolies be described as interdependent?

A

The action of one firm can influence the next. This can create uncertainty in the market.

33
Q

Consumer surplus

A
  • A measure of the economic welfare enjoyed by a consumer.

- Surplus utility received over and above the price paid for a good

34
Q

Producer surplus

A

A measure of the economic welfare enjoyed by a producer

35
Q

Price discrimination

A

Charging different prices to different customers, but they’re receiving the exact same good/ service, based on willingness to pay.

36
Q

First degree price discrimination

A

(Perfect/ Pure discrimination) Firms charging maximum possible price to individual consumers. There is perfect information and no consumer surplus.

37
Q

Second degree price discrimination

A

Charges maximum possible price to different consumer groups based on their willingness to pay.

38
Q

Third degree price discrimination

A

Charging different consumers by identifying similar characteristics. Eg. based on age, sex, geography etc.

39
Q

Conditions needed for price discrimination

A
  • Need to be able to group people
  • Price elasticities
  • Market must be separated to prevent seepage. (Stops people from misusing the system)
40
Q

Positives of price discrimination

A
  • Abnormal profits may be reinvested, making better quality products
  • Those on lower incomes may be able to access services
  • Using the inelastic markets to help generate normal profit
41
Q

Drawbacks of price discrimination

A
  • If a firm with monopoly power is able to earn supernormal profits it can be seen as inequitable
  • Increasing producer surplus
  • May be seen as exploitative to those in greatest need
42
Q

Short run benefits of competition in perfectly competitive firms

A

They benefit from supernormal profits

43
Q

Long run benefits of competition in perfectly competitive firms

A

They benefit from efficiencies. (Productive, Allocative and Static)

44
Q

Contestable market

A

A market where there’s potential for new entrants.

45
Q

Perfectly contestable market and

A
  • No barriers to entry/ exit
  • No sunk costs
  • Perfect information
  • FoP are perfectly mobile
  • All firms have the same access to technology
  • No economies of scale
  • If firms set prices above AC new firms will join.
  • If original firms set their prices lower than AC, hit and run firms may leave
46
Q

Non contestable market

A

When there’s no potential for new entrants

47
Q

What’s the difference between a perfectly competitive market and a perfectly contestable market?

A

Contestable markets can sell heterogeneous and homogeneous products whereas perfectly competitive markets can only sell homogeneous products.

48
Q

Hit and run competition in contestable markets

A

New entrants can enter the market, make profit, then leave very easily.

49
Q

Improved products

A

firms attempt to innovate in order to improve products

50
Q

Efficiencies of perfectly contestable markest

A
  • Productive- operate at lowest point of AC
  • Allocative- AR=AC
  • Dynamic- firms innovate in order to operate at lowest point of AC

Economics- Micro (6 decks)

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